Week in Review

So who’s to blame for Detroit? The greedy. The greed of the public sector. Who stole as much as they thought possible from future generations. Laughing all the way to the bank. But never did they think that their greed would eclipse the paying-ability of those they were stealing from. Future taxpayers. Which is what happened in Detroit. And will probably happen elsewhere throughout the nation (see The Unsteady States of America posted 7/27/2013 on the Economist).

Nearly half of Detroit’s liabilities stem from promises of pensions and health care to its workers when they retire. American states and cities typically offer their employees defined-benefit pensions based on years of service and final salary. These are supposed to be covered by funds set aside for the purpose. By the states’ own estimates, their pension pots are only 73% funded. That is bad enough, but nearly all states apply an optimistic discount rate to their obligations, making the liabilities seem smaller than they are. If a more sober one is applied, the true ratio is a terrifying 48% (see article). And many states are much worse. The hole in Illinois’s pension pot is equivalent to 241% of its annual tax revenues: for Connecticut, the figure is 190%; for Kentucky, 141%; for New Jersey, 137%.

By one recent estimate, the total pension gap for the states is $2.7 trillion, or 17% of GDP. That understates the mess, because it omits both the unfunded pension figure for cities and the health-care promises made to retired government workers of all sorts. In Detroit’s case, the bill for their medical benefits ($5.7 billion) was even larger than its pension hole ($3.5 billion).

Some of this is the unfortunate side-effect of a happy trend: Americans are living longer, even in Detroit, so promises to pensioners are costlier to keep. But the problem is also political. Governors and mayors have long offered fat pensions to public servants, thus buying votes today and sending the bill to future taxpayers. They have also allowed some startling abuses. Some bureaucrats are promoted just before retirement or allowed to rack up lots of overtime, raising their final-salary pension for the rest of their lives. Or their unions win annual cost-of-living adjustments far above inflation. A watchdog in Rhode Island calculated that a retired local fire chief would be pulling in $800,000 a year if he lived to 100, for example. More than 20,000 retired public servants in California receive pensions of over $100,000.

This is an important point. People say that we must honor these lavish pension and retiree health care benefits because they made a deal. A contract with the city. Or the state. But did they? No. The public sector unions and the cities and states colluded together to steal money from future generations. Who were not a party to those agreements. This amounts to generational theft. And the generous size of those benefits just makes that theft worse. Transforming the public sector into an aristocracy. That cares little for the future taxpayers that they will be bled dry to pay for their long and comfortable retirements.

Detroit is just the first domino to fall. This generational theft is just unsustainable. Something has to be done. But what?

Public employees should retire later. States should accelerate the shift to defined-contribution pension schemes, where what you get out depends on what you put in. (These are the norm in the private sector.) Benefits already accrued should be honoured, but future accruals should be curtailed, where legally possible. The earlier you grapple with the problem, the easier it will be to fix. Nebraska, which stopped offering final-salary pensions to new hires in 1967, is sitting pretty.

In other words our public servants should not live a better life than their masters. Those people paying the bill. There should be no aristocracy in the United States. People in the public sector shouldn’t be able to retire young and live a long life in retirement while someone else is paying the bill. The taxpayer. People who have to work until they drop dead to save for their own retirement. That just isn’t right. If our servants in the public sector want that long and comfortable retirement then they must do what people in the private sector do. Save for it. Make sacrifices. And live more frugally. Because there shouldn’t be two Americas. Where one enslaves the other. While setting up a string of municipal and state bankruptcies because of their greed that threatens the financial wellbeing of the nation.

The Founding Fathers Purposely made it Difficult for the New Federal Government to Spend Money

Benjamin Franklin knew. He knew what would happen once the people learned they held the keys to the treasury. “When the people find they can vote themselves money, that will herald the end of the republic.” All the Founding Fathers knew this. This is why they created a representative government. They put other people between the people and the treasury. A lot of people. Responsible people. People who knew better. Or should know better.

It started with the separation of powers. The country needed a leader. But they didn’t want a king. They wanted a leader with limited powers. So they limited the president’s access to money. The Founding Fathers gave the power of the purse to the House of Representatives. The president could only spend the money Congress allowed the president to spend. The president could veto spending. But Congress could override this veto by a two-thirds majority in both the House and the Senate. So the president can try to stop spending. But he simply can’t spend at will.

But neither can the House. Because the Senate has to approve any spending initiated by the House. Before it can even get to the president. The Founding Fathers purposely made it difficult for the new federal government to spend money. To limit the power and breadth of the federal government. By limiting its money. Even after the president signs it into law. Should any questionable spending pass both houses, and the president approves it, we can still challenge it. By the third branch of government. The judiciary. Which further checks the power of federal government. On the rare occasion when the federal government passes bad legislation.

As Originally Written in the Constitution the States’ Legislatures Voted for a States’ Senators

Back at the Founding the states were very powerful. They were nation-states. Joined together only by a loose and weak confederation. And very suspect of any distant, centralized power. Whether it be a king on the far side of the Atlantic. Or a president on the near side. To get the new Constitution ratified the Founding Fathers knew they had to appease the states’ concerns. And they did that with the Senate. The states’ house.

As they originally wrote the Constitution, we elected the members of the House of Representatives by popular vote. But not the Senate. The states’ legislatures voted for their states’ senators. These state legislators who we elect by popular vote in their states. This put even more people between the people and the treasury. And gave the states a way to rein in a federal government that strayed too far from their Constitutional boundaries.

But that all changed with the Seventeenth Amendment (1913). At the dawn of big, progressive government. When great amounts of power transferred from the states. To the growing federal government. And the spending began. The states’ legislatures no longer voted for states’ senators. The people now voted for their senators. By direct popular vote. And got closer to the national treasury.

The federal government grew as we removed these other people from between the people and the treasury. Responsible people. People who knew better. Or should know better. Now people were closer to the federal treasury. And they slowly learned what Benjamin Franklin feared. They learned that they could vote themselves money. And did.

Responsible, limited government went out the window. Pandering for votes was in. Rugged individualism was descendant. And the nanny state was ascendant. Federal government spending grew. Federal taxes grew. And federal debt grew. Because you won elections by giving people stuff. Paid for with other people’s money. Which was key. You didn’t win elections by raising people’s taxes. You won them by raising other people’s taxes. And the way you do that is with class warfare.

In the beginning class warfare was easy. Because the federal budget was a lot smaller than it is today. So you didn’t need very high tax rates. And the population base was growing. A lot of families had closer to 10 children than the 2.3 children of today. So having lots and lots of new taxpayers in subsequent generations would produce a steady and growing stream of federal tax revenue. But as spending grew and the population growth rate declined, that caused revenue problems. Requiring higher and higher tax rates. And more and more bitter class warfare.

The General Trend of Defining ‘Rich’ Downward has Redefined the Middle Class as ‘Rich’

With the higher spending and falling revenue budget crises followed. Which ramped up the class warfare. Pitting the ‘rich’ against the poor and the middle class. Of course they kept redefining ‘rich’ as they needed to raise more and more tax revenue. First calling the superrich fat-cat industrialists and Wall Street bankers ‘rich’. The billionaires. Then they included the millionaires. But when they could no longer pay for the growing cost of the federal government people earning less and less were lumped in with these super rich. Until today it’s someone making as little as $250,000 a year.

Anyone who says these people should pay their fair share should understand the general trend of defining ‘rich’ downward. And that line that defined ‘rich’ has moved a long way down. Closer and closer to the middle class. Like those earning $250,000. Many of these people aren’t rich. Not by a long shot. Despite earning $250,000. They’re small business owners. People who risk everything to run a restaurant. Or start a construction business. The number one and number two type of business that fails. Because they can’t cover their bills. And grow their businesses. Despite having business income of $250,000.

The problem isn’t that the rich aren’t paying their fair share of taxes. It’s that the government is spending too much. In their eternal quest to buy votes. By granting more and more government largess to the poor and middle class. Courtesy of the rich. Who will soon be anyone with a job. Because of that growing federal spending. And a declining birthrate.

Today’s Benefits are Paid by the Rich and Future Generations

As Benjamin Franklin feared this spending is threatening the health of his republic. And governments around the world. Because people learned that they could vote themselves money. And politicians were only too glad to oblige. Promising ever more. In exchange for votes. By providing ever more generous and growing government benefits. Confident that they didn’t have to pay for these costs. Instead, they could simply pass the cost of this largess to future generations. Who don’t vote today.

So today’s benefits are in fact paid by the rich. Who are small in numbers. And future generations. Who aren’t voting yet. You see, it’s easy to provide benefits today. That helps garner votes for today. When the costs of these benefits will be borne by a subsequent generation. A generation so far out into the future that they have no say today. But over time this future generation has gotten closer and closer to the current generation. So close that people alive today will be paying for benefits of today. More importantly, this future generation is already voting today. And that’s a BIG problem for a growing government. So expect the class warfare to get uglier still.

This could herald the end of the republic. Unless the current generation learns that they are in fact the future generation. And that they are the new ‘rich’. Regardless of how much they earn. And they’ll learn this fast as they pay for everyone else. After which they’ll see that there’s nothing left for them. Then they’ll take notice. And stop the insanity. Then, and only then, will they stop voting themselves money.